MARKET WATCH: Saudi king's 'fair level' pledge brings down oil prices

Energy prices generally dropped Mar. 20 with crude oil down 2% in the New York market after King Abdullah bin Abdul-Aziz Al Saud said Saudi Arabia would bring the price down to “fair levels” and the US granted Japan and 10 European countries exemptions from an Iranian oil trade embargo.

“However, the Saudi oil minister brought us back to reality in the afternoon, rehashing the same old arguments made in the first half of 2008 that current fundamentals do not justify the oil prices, that Saudi Arabia will answer demand but it does not yet see demand, and that it stands ready to act one day but not today,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “Saudi Arabia will continue to blame the oil speculators for the high oil prices while at the same time cashing in on what will very probably be a record budget surplus.”

Jakob advised, “Washington better work on its Strategic Petroleum Reserve plan because the Saudi oil minister has not said anything to have any confidence that there is a plan to replace the oil flows that the West is trying to stop from Iran. It is difficult not to see the management of the oil embargo on Iran as one big mess and in the end nothing reassuring for the oil markets is coming out of Saudi Arabia.”

He noted, “China’s imports from Iran in February were 213,000 b/d lower than a year ago, and its imports from Saudi Arabia were 363,000 b/d higher. However, it was already known that China was importing low volumes of Iranian crude oil in February while the discussions on the term contracts were ongoing. For the first 2 months of the year, China imported 110,000 b/d less crude oil from Iran; 260,000 b/d more crude oil from Saudi Arabia; and 300,000 b/d more from Russia.”

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James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Real effect on oil prices will have to come from a meaningful increase in physical crude supply from Saudi Arabia. As the market often overshoots on either side, the Saudis might be worried that they get more than they are bargaining for once the price starts to come off, at least for a brief period of time. This could be why Saudis are unwilling to flood the market even if they have the capacity to do so. It may also be why they are generally against a reserve release from the US and other Organization for Economic Cooperation and Development countries. However, there are few other options available to bring the price down in a meaningful way.”

Zhang said, “Despite fairly wide daily trading ranges, front-month Brent and West Texas Intermediate have changed less than $2/bbl since the beginning of this month. Consequently, implied volatility in both contracts has declined further. We do not expect these relatively calm market conditions to last long as the oil market braces itself for possible interventions or even shocks. We start to see implied volatility being undervalued, particularly at the front-end of the term structure.”

He said, “Oil products fared better than crude oil as the market continued to focus on a reduced global refining capacity amid the spring maintenance season. The term structure in Brent also weakened sharply yesterday led by the sell-off in flat prices.”

In other news, analysts in the Houston office of Raymond James & Associates Inc. reported, “The only prices that appeared to head north [Mar. 20] were those of Chinese solar panels after the US Commerce Department slapped them with small import duties in response to China's alleged unfair trade practices.”

The punitive tariffs on Chinese solar manufacturers “were milder than had been feared by the industry, hence yesterday's relief rally across Chinese solar stocks, with several gaining more than 10%,” they said. “To be clear, yesterday's ruling is only preliminary, with the final decision expected by yearend. And while this news helps lift a regulatory overhang, it does nothing to eliminate the fundamental industry-wide problem of systemic photovoltaic overcapacity.”

US inventories

The Energy Information Administration said Mar. 21 commercial US inventories of crude dropped 1.2 million bbl to 346.3 million bbl in the week ended Mar. 16. The Wall Street consensus was for an increase of 2.2 million bbl. Gasoline stocks dropped 1.2 million bbl to 226.9 million bbl, short of the 2 million bbl decline analysts expected. Finished gasoline inventories increased while blending components decreased. Distillate fuel stocks gained 1.8 million bbl to 136.6 million bbl last week, countering the 2.2 million bbl draw the market expected.

Imports of crude into the US dropped 492,000 b/d to 8.2 million b/d last week. In the 4 weeks through Mar. 16, crude imports averaged 8.7 million b/d, up 215,000 b/d from the comparable period last year. Gasoline imports last week averaged 632,000 b/d while distillate fuel imports averaged 174,000 b/d.

The input of crude in to US refineries declined by 100,000 b/d to 14.4 million b/d last week with units operating at 82.2% of capacity. Gasoline production decreased to 8.8 million b/d while distillate fuel production increased to 4.3 million b/d.

Energy prices

The April contract for benchmark US light, sweet crudes expired Mar. 20 at $105.61/bbl, down $2.48 for the day on the New York Mercantile Exchange. The May contract fell $2.49 to $106.07/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.48 to $105.61/bbl.

Heating oil for April delivery dropped 2.46¢ to $3.24/gal on NYMEX. Reformulated stock for oxygenate blending for the same month dipped 0.47¢ to $3.36/gal.

The April natural gas contract lost 1.6¢ to $2.34/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., climbed 6.3¢ to $2.19/MMbtu.

In London, the May IPE contract for North Sea Brent was down $1.59 to $124.12/bbl. Gas oil for April fell $11.50 to $1,032/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes decreased $1.05 to $123.03/bbl.